Globalization and technological change have had a profound impact on the way goods and services are produced and brought to market in the modern world. The cost structure of many firms has been reduced by outsourcing to lower-wage economies. Furthermore, the advent of the communications revolution has effectively increased the minimum efficient scale for many industries, as we illustrated in Production and cost (Figure 8.7). Larger firms are less difficult to manage nowadays, and the LAC curve may not slope upwards until very high output levels are attained. The consequence is that some industries may not have sufficient “production space” to sustain a large number of firms. In order to reap the advantages of scale economies, firms become so large that they can supply a significant part of the market. They are no longer so small as to have no impact on the price.
Outsourcing and easier communications have in many cases simply eliminated many industries in the developed world. Garment making is an example. Some decades ago Quebec was Canada’s main garment maker: brokers dealt with cottage-type sewers and assemblers outside Montreal and Quebec City. But ultimately the availability of cheaper labour in the developing world combined with efficient communications undercut the local manufacture. Most of Canada’s garments are now imported. Other North American and European industries have been impacted in similar ways. Displaced labour has been required to retool, move to the service sector of the economy or retire.
Globalization has had a third impact on the domestic economy, in so far as it reduces the cost of components. Even industries that continue to operate within national boundaries see a reduction in their cost structure on account of globalization’s impact on input costs. This is particularly in evidence in the computing industry, where components are produced in numerous low-wage economies, imported to North America and assembled into computers domestically. Such components are termed intermediate goods.
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